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Overhead and Profit

Okay I could read all the previous posting and probably locate my answer...I haven't visited lately but I came across a piece of information and wanted to ask...

What are you charging for Profit. When I ask other contractors or read about Profit and Overhead...One number is given ex. 18% or 15%. Is that profit and overhead? Is overhead a separate line item in your quote and then profit is calculated after that? What are you'all doing?

Re: Overhead and Profit

Sue, You're right this has been discussed many times but until we all get it right we will continue to discuss it.

In finalizing a price for a project there are three things that you must now in order to have an accurate price for yourself. I say yourself because if the price is not right for you it doesn't matter if the client likes it or not. Remember we do this to make a buck (or more.)

1) Actual hard cost of the project (labor and materials)

2) Overhead cost (what it cost to run your company for the amount of time it will take to complete this project. Once you know this figure consistently you can relate it to a percent of actual sales.

3) How much profit you want to make on this project. I'm not talking wages for yourself but profit for your company. Owner's wages should be part of overhead.

If you know these numbers and track them accurately time after time you will be able to complete estimates with percentages for profit and overhead and make some money. Our company has an overhead percentage of 26.4%. We have to sell our projects at a minimum price of 50% over our estimated hard costs in order to make a buck.

I am interested in more than just a buck so we normally sell for a mark-up of 75% over estimated hard costs. We have been known to sell for less than that but also for more than 75%. It can be done. Good luck.

Re: Overhead and Profit

Let me get this right. If you have a house with hard cost of $100,000.00 then you charge another $75,000.00 on top of that? The total cost of the house is then $175,000.00. So 50%($50,000) profit and 25%($25,000) overhead? Just trying to get a clear picture. Thanks for responding.

Re: Overhead and Profit

Sue, You've got the right idea but your math is incorrect. The 25% overhead is based on the sales price.

Sales Price = 175,000 (100k hard cost +75% markup)

25% Overhead = 43,750

Gross Profit = 31,250

or Gross Profit is about 17.8%

We are remodeling contractors and these numbers are often the case. New home construction is quite diferent and I'm not familiar enough with those numbers to say anything. You can definitely build a 175k new home quicker than you can remodel a 175k project so the overhead figures are quite different.

Re: Overhead and Profit

I too, am trying to get a handle on overhead and profit. I have been charging 10% for overhead and 5% for profit. According to the NAHB, this is calculated as follows:(which I use)
Assume cost of new home is $100,000:

100,000 x 15%

-------------- = $17,647 profit & overhead

.85

Is this standard, or is their another method being used? I admit I must explain the above calculation to each client and they sometimes develop selective memory near the end of the project; especially if they have added extensive enhanced selections.

Re: Overhead and Profit

Most people understand a markup on cost to be just that, you take your cost and add a percentage to it. That is what you are telling them you are doing in the calculation you presented -

100,000 x 15%

yes, it actually equals 15,000, not 17,647.

But you are not actually adding 15% to your cost. You are really trying to calculate a margin of 15% of the selling price - not the cost. You can calculate this by using the cost as a basis (which is where you came up with dividing by .85), but you are actually adding 17.65% to the cost (rounded to 2 places), not 15%. But why not keep it simple. If you want 15% margin, just tell the customer you are adding 17.65% to everything. Or better yet, give yourself a slightly better margin and just add 20% - it's easier for everybody to understand and calculate.

Re: Overhead and Profit

Figuring overhead is a simple exercise. Its simpply marking up the direct costs by an amount that covers the indirect costs of running your company. Remember that these indirect costs should not only be for the time you're actually working on this particular job, but it must cover you till the next job starts. We all have down-time, so don't forget to include that in you figuring.

As far as profit, look at it this way. What would you be able to get on your investment in your company if you were to take the whole shebang and invest it in mutual funds or something else? There would be a rate of return of between 10 and 20+% per year. So you should be getting that return, or better, on you money, as the company's owner. Your alternative is to invest your capital in something more stable (like mutual funds), so you should be getting a return on your money at least as good as the alternatives. That's just one frustrated owner's opinion.
SJ

Re: Overhead and Profit

Maybe you aren't suppose to advertise, but there is one book that was immensely helpful to me. As these responses indicate, there is more to it than a particular percentage added to the bottom line. Try The Remodeler's Guide to Making and Managing Money, by Linda Case. Very clear and informative!